Churning Out the Cash: What Is Payroll?

What is payroll? It’s where business owners spend about 21 days a year. If you’re a small business owner with employees, you’re likely to join the 63% of business owners who underestimated the time to do payroll.

It’s difficult enough to run a small business, but when you throw in the responsibilities of processing payroll, it can become overwhelming.

Don’t worry about processing payroll because we have you covered. Read on to learn what payroll is and get payroll management tips.

What Is Payroll?

The payroll definition is the act of paying employees the wages earned during a specific period of time.

Those blocks of time are called pay periods. For most small businesses, pay periods are either twice a month or every other week. Other businesses pay on a weekly or monthly basis.

On the surface, the act of paying employees seems simple. You tally up the number of hours worked, multiply it by their hourly rate, and cut a check.

That’s how most business owners envision payroll.

What they miss is that you’re responsible for withholding taxes and paying payroll taxes. That’s what takes up so much time.

How Does Payroll Work?

Here’s what small business owners need to do when they hire employees. They have employees fill out several forms. One of them is a W-4 form, which tells employers how many exemptions they have.

The more exemptions, the fewer taxes get withheld. For someone with zero exemptions, they get the most withheld from their paychecks.

When it’s time to pay employees, you collect their timesheets and process the amount of money earned, plus vacation and overtime. That’s their gross pay.

Now it’s time to calculate how much taxes get withheld. Start with FICA taxes which are taxes withheld for Social Security and Medicare.

This amounts to 1.45% and 6.2% for Medicare and Social Security, respectively. You withhold this and match those amounts as the employer’s contributions to each fund.  

They get paid as part of payroll taxes.

Now it’s time to calculate federal income taxes. The percentage withheld depends on the number of exemptions, amount of wages, and filing status. You need to refer to the IRS withholding table to get the correct amount.

There may both other types of withholding, such as state income taxes, 401 (k) contributions, and health care benefits.

Payroll Management Tips

You could process payroll manually. It might seem like the easiest thing to do if you have one or two employees. What you might not realize is that manual processing leads to mistakes.

Errors cost small business owners fines and penalties, whether they were deliberate or not.

You can reduce payroll mistakes by using software or outsourcing to payroll services.

Outsourcing is preferred by many small business owners because it reduces the time and stress of processing payroll on your own.

Learning Payroll Basics

What is payroll? For most small business owners, it’s the long process of calculating employees’ paychecks.

Now that you know how payroll works, you can take steps to limit the amount of time spent on processing payroll.

Are you ready for more business tips? Check out the other articles on the blog today.